Aep_foreign Exchange Reserves & Global Currency Imbalances

ASSOCHAM ECO PULSE STUDY “BRIC: Forex reserves & Global currency imbalances” February 2009

Prepared by Gaurav Sharma Assocham Research Bureau

INTRODUCTION At a time of rising economic uncertainties, foreign exchange reserves have gained much larger importance in the present global scenario. A nation’s foreign exchange reserves provide a cushion to protect the economy from speculative capital movements. From a peak of USD 315.6 billion in June 2008, India’s foreign exchange reserves plunged by USD 67 billion to USD 248.6 billion in January end 2009. The AEP study “BRIC: Forex reserves & Global currency imbalances” has analyzed the interplay between the international currency dynamics and its impact on the foreign exchange reserves of the BRIC countries since the collapse of Lehman Brothers shook the world, exacerbating the global financial crisis.

During September 2008 – January 2009, the foreign exchange reserves of Russia plummet by a whopping USD 175 billion followed by India’s decline of USD 43.2 billion. Brazil recorded a moderate fall of USD 6 billion in its international reserves position whilst China adding USD 4 billion, however at a diminishing pace. The BRIC together hold about 41 percent of global foreignexchange reserves.

In a bid to put breaks to depreciation/devaluation in domestic currencies, the monetary authorities’ intervention by flowing dollars to stem the downward pressure on local currencies has led to massive drainage of international reserves.

PARAMETERS The AEP study has taken into account parameters relating to the Foreign exchange reserves, exchange rates and Balance of Payments (BoP) and GDP of BRIC countries to assess the impact of financial crisis led global currency imbalances in these emerging countries as the drivers of the world economic growth.

DATA SOURCE The data for analysis has been taken from the Central Bank’s website of BRIC: Brazil:

http://www.bcb.gov.br/

Russia:

http://www.cbr.ru/eng/

India:

http://www.rbi.org.in/

China:

http://www.pbc.gov.cn/english/

The data for latest available BRIC GDP (nominal) for the Year 2008 has been taken from Central Intelligence Agency (CIA) website METHODOLOGY I.

An inter group analysis of BRIC countries has been done for the following parameters: i. Foreign exchange reserves ii. Currency movement against US dollar iii. Balance of Payments (BoP)

II.

Changes in foreign exchange reserves have been taken between September 2008 and January 2009 to ascertain the impact of global financial crisis on the international reserve position of BRIC. The difference in the forex reserves during the period has also been measured as a loss/gain in terms of percentage of GDP.

III.

Depreciation/Appreciation of BRIC currencies have been calculated using the Inter-bank rates against the US dollar.

IV.

An analysis of Current account and Capital account surplus/deficit along with the overall Balance of Payments (BoP) of BRIC countries has been done to understand the forces under play on the currency side.

V.

For India, while understanding the behavior of currency movements and its impact on forex reserves, the Reserve Bank of India’s monthly purchase and sales data of the US dollars has been taken for April – November 2008.

VI.

Monthly data on foreign exchange turnover in the merchant and Inter-bank segment has been analyzed for September 2008 – January 2009.

EXECUTIVE SUMMARY


The global financial crisis, by way of triggering currency imbalances internationally, is fast eroding the foreign exchange reserves of Russia and India along with a moderate decline in Brazil while China still being able to accumulate; however at a decelerating pace.




Foreign exchange reserves of Russia have fallen by a whopping USD 175 billion since September 2008 followed by India’s decline of USD 43.2 billion. Brazil recorded a moderate decline of USD 6 billion in its international reserves position whilst China adding USD 4 billion however at a diminishing pace.




Among the BRIC currencies, only Chinese Yuan Renminbi held strong against the US dollar due to its twin surplus (Current as well as Capital account) in the overall strong Balance of Payment (BoP). During September – January 2008-09, the Chinese currency depreciated by a miniscule 0.19 per cent.




Between September 2008 and January 2009, Russia’s Ruble devalued by a staggering 44.71 per cent while Brazilian Real depreciated by a massive 41.46 per cent against the US dollar.




Ever since the global financial crisis emanated to take its toll on the Indian economy, Indian rupee has been under strong pressure against the US dollar; that initiated the RBI to sell dollars to resist the fall in domestic currency. Indian Rupee depreciated by 12.58 per cent during September 2008 – January 2009.




From a peak of USD 315.6 billion in June 2008, India’s foreign exchange reserves plunged by USD 67 billion to USD 248.6 billion in January end 2009.




During April-November 2008, the RBI net sold US dollars to the tune of 31.4 billion against net purchases of USD 55.2 billion made during the corresponding period in 2007.

Crisis led global currency imbalances triggering rapid depletion of forex reserves: AEP

The global financial crisis, by way of triggering currency imbalances internationally, is fast eroding the foreign exchange reserves of Russia and India along with a moderate decline in Brazil while China still being able to accumulate; however at a decelerating pace, an inter BRIC analysis of Assocham Eco Pulse (AEP) revealed. Exacerbated after the collapse of Lehman Brothers in mid September 2008, the global financial crisis led to an uncharacteristic plight to safety in the face of US dollar despite heavy disbursal of the greenback by the US Federal Reserve. The US dollar soared to unprecedented heights against major international currencies marking the end of 2008.

The US dollar has gained relative strength against major international currencies despite the key policy rate cuts to as low as 0 – 0.25 per cent by the US Federal Reserve along with enhanced measures to boost dollar supplies to deal with the credit crunch. Between September 2008 and January 2009, the Euro and British Pound depreciated by 14.5 per cent and 27.4 per cent respectively against the greenback.

In a bid to put breaks to depreciation/devaluation in domestic currencies, the monetary authorities’ intervention by flowing dollars to stem the downward pressure on local currencies has led to massive drainage of international reserves.

Foreign exchange reserves of Russia have fallen by a whopping USD 175 billion (10 % of GDP) since September 2008 followed by India’s decline of USD 43.2 billion (3.5 % of GDP). Brazil recorded a moderate decline of USD 6 billion (0.4 % of GDP) in its international reserves position whilst China adding USD 4 billion (1 % of GDP) however at a diminishing pace.

BRIC: FOREIGN EXCHANGE RESERVES AND CURRENCY MOVEMENTS

Foreign Exchange Reserves (in USD billion) Country

September-08

January-09

Difference

Depn(+) / Appn(-) against USD (in %) (Sep – Jan 2008-09)

Brazil

207.0

200.8

-6.2

41.46

Russia

563.6

388.1

-175.5

44.71

India

291.8

248.6

-43.2

12.58

1946.0*

40.4

0.19

China

1905.6 Source: respective Central Bank websites *corresponds to December 2008 (latest available)

Among the BRIC currencies, only Chinese Yuan Renminbi held strong against the US dollar due to its twin surplus (Current as well as Capital account) in the overall strong Balance of Payment (BoP). During September – January 2008-09, the Chinese currency depreciated by a miniscule 0.19 per cent. Even as the Chinese forex reserves swollen by USD 40.4 billion to USD 1.95 trillion during the period in 2008, the growth rate in its forex reserves took a dip for the first time since the year 2000.

In case of other BRIC countries, Russia’s Ruble devalued by a staggering 44.71 per cent during the same period. The Russian central bank expanded its trading range for the ruble 20 times since midNovember before policy-makers switched policy to let market forces help determine the exchange rate within a widened limit. Tumbling oil prices and an exodus of capital put pressure on the Russian currency which led to a steep decline in its forex reserves.

During September – January 2008-09, Brazilian Real depreciated by a massive 41.46 per cent against the US dollar. However, robust capital inflows as evident from a capital account surplus of USD 36 billion and an overall balance of USD 8.6 billion (for January – November 2008) resisted an otherwise possible steep downfall in Brazil’s foreign exchange reserves.

Ever since the global financial crisis emanated to take its toll on the Indian economy, Indian rupee has been under strong pressure against the US dollar. The rupee breached the psychological Rs 50/USD level in November 2008 and has been under sustained pressure against the greenback that initiated the RBI to sell dollars to resist the fall in domestic currency. Indian Rupee depreciated by 12.58 per cent during September 2008 – January 2009.

Balance of Payments (BoP) in billion USD Country Brazil Russia India China

Current Capital account (A) account (B)

Errors & Omissions (C)

Overall Balance (A+B+C)

Period

-25.8

35.9

-1.5

8.6

Jan-Nov 2008

90.8

1.3

-6.4

85.7

Jan-Sep 2008

-12.5

8.2

-0.4

-4.7

Jul-Sep 2008

191.7 71.9 Source: respective Central Bank websites

17.1

280.7

Jan-Jun 2008

THE INDIAN CASE: An indicative analysis of the Reserve Bank’s policy stance to fend off depressing forces on the Indian Rupee suggests that the heavy volumes of dollar sold by the monetary authority to avoid exchange rate depreciation has led to the rapid depletion of foreign exchange reserves.

From a peak of USD 315.6 billion in June 2008, a plunge of USD 67 billion in India’s foreign exchange reserves to USD 248.6 billion in January end 2009 has been a consequence of RBI’s strong measures to stem the global pressures on the Indian currency via draining US dollars to support the domestic currency.

During April-November 2008, the RBI net sold US dollars to the tune of 31.4 billion against net purchases of USD 55.2 billion made during the corresponding period in 2007 (thereby adding to India’s forex reserves).

In October 2008 alone, RBI net sold more than USD 18 billion to stem the mounting pressure on Indian Rupee as the country’s Exports registered a negative growth of 10.1 per cent that led to a widening trade as well as Current account deficit.

Net Sale of USD by RBI (in million USD) Month September-08 October-08 November-08

Total

Volume 3784 18666 3101

25551

Source: Reserve Bank of India

In the three months to November 2008, RBI net sold US dollars to the tune of whopping 25.5 billion to offset mounting pressure from negative growth in Exports during October – November 2008 and FII outflow of USD 6.5 billion from the Indian equity markets.

On the External Commercial Borrowings (ECBs) front, Indian corporate sector has acted reluctantly to the recent policy initiatives by the RBI. The external commercial borrowings for the period April to November 2008 declined steeply at a rate of 35.74 per cent as the gross amount raised through this route slipped from USD 21.45 billion in 2007 to USD 13.78 billion in 2008.

Out of the USD 1142 million of ADR/GDRs issued by the Indian companies during April – November 2008, only 7 million were raised between September and November as the collapse of Lehman Brothers shook the stock markets world over.

Also, despite the hike in the interest rate ceiling on the Non Residents deposits [FCNR(B) and NR(E)RA] by the RBI, the growth in these deposits failed to pick up during the period straining the capital inflows to the country.

In November 2008, the Indian Rupee had been trading close to Rs 50 per US dollar under sustained pressure from rising trade as well as current account deficit and rapidly declining capital inflows. The foreign exchange turnover data for November 2008 indicates the upheaval in the merchant as well as the inter-bank foreign exchange market.

Net Sale of USD in foreign exchange market (September-January 2008-09) All Figures are in USD Millions Month/Position September 08 October 08 November 08 December 08

MERCHANT FCY/INR Spot Forward 4882 9315 31948 480

7909 10359 27784 -892

INTER BANK FCY/INR Spot Swap Forward -11786 -22814 80693 -4787

negative figures (-) represent net purchase Source: Reserve Bank of India, Foreign Exchange Turnover Data & Assocham Research Bureau

8179 3674 115560 -1356

94 2482 16666 143

APPENDIX: Table 1: Sale-Purchase of US dollars by RBI

Sale-Purchase of US dollars by RBI (in million USD) Month

Purchase (+) 2008-09 2007-08

April 4,325.00 May 1,625.00 June 1,770.00 July 3,580.00 August 3,770.00 September 2,695.00 October 1,960.00 November 2,355.00 Total (April - November) 22,080.00 Source: Reserve Bank of India

Difference

Sale (–) 2008-09 2007-08

2,055.00 4,426.00 3,192.00 11,428.00 1,815.00 11,867.00 12,544.00 7,827.00

2,270.00 -2,801.00 -1,422.00 -7,848.00 1,955.00 -9,172.00 -10,584.00 -5,472.00

— 1,477.00 6,999.00 9,900.00 2,560.00 6,479.00 20,626.00 5,456.00

55,154.00

-33,074.00

53,497.00

Difference

— — — — — — — — 0.00

Net (+/–) 2008-09

0.00 1,477.00 6,999.00 9,900.00 2,560.00 6,479.00 20,626.00 5,456.00

4,325.00 148 -5,229.00 -6,320.00 1,210.00 -3,784.00 -18,666.00 -3,101.00

2,055.00 4,426.00 3,192.00 11,428.00 1,815.00 11,867.00 12,544.00 7,827.00

53,497.00

-31,417.00

55,154.00

Table 2: Depreciation /Appreciation of BRIC currencies against US dollar

BRIC currencies movement against US dollar (in %) Depreciation (+) / Appreciation(-) September-January 2008-09 Source: x-rates.com

Net (+/–) 2007-08

Brazil

Russia

India

China

41.46

44.71

12.58

0.19

Table 3: Foreign Institutional Investments (FIIs) September – January 2008-09 Net Investment( in million USD) Market at month exchange rate

Month Sep-08

Equity Debt

-2,052 794

Oct-08

Equity Debt

-3,805 -461

Nov-08

Equity Debt

-644 1,045

Dec-08

Equity Debt

434 155

Jan-09

Equity Debt

-1,052 199

Sep-Jan 08-09

Equity Debt

-7,120 1,733

Source: SEBI

Table 4: Foreign Direct Investment (FDI) September – November 2008 Month September October November Source: DIPP

2008 (in USD million) 2,562 1,497 1,083

2007 (in USD million) 713 2,027 1,864

% change (y-on-y) 259.33 -26.15 -41.90

% change (m-on-m) -41.57 -27.66

Table 5: India’s Balance of Payments

India's Overall Balance of Payments (US $ million)

Items

Apr-Jun 2008 PR Credit Debit Net

Jul-Sep 2008 P Credit Debit Net

A. CURRENT ACCOUNT I. Merchandise II. Invisibles (a+b+c) a) Services i) Travel ii) Transportation iii) Insurance iv) G.n.i.e. v) Miscellaneous of which Software Services Business Services Financial Services Communication Services b) Transfers i) Official ii) Private c) Income i) Investment Income ii) Compensation of Employees Total Current Account (I+II)

49060 37382 21633 2504 2530 350 130 16119

79626 –30566 16610 20772 11458 10175 2164 340 3328 –798 228 122 110 20 5628 10491

47672 86287 –38615 45528 19451 26077 26313 13612 12701 2786 2669 117 3041 3744 –703 370 306 64 81 95 –14 20035 6798 13237

10656 3699 745 510 12176 151 12025 3573 3418 155 86442

857 3114 628 226 665 118 547 4487 4157 330 96236

9799 585 117 284 11511 33 11478 –914 –739 –175 –9794

11220 924 10296 5003 3515 1488 1018 965 53 740 296 444 15070 838 14232 53 106 –53 15017 732 14285 4145 5001 –856 3855 4684 –829 290 317 –27 93200 105738 –12538

52921 12157 11918 10240 1502 176 239 239 — — 40764 40745 19 13851 909

48138 3163 22 22 — — 3141 2339 271 531 44975 44923 52 9622 558

4783 8994 11896 10218 1502 176 –2902 –2100 –271 –531 –4211 –4178 –33 4229 351

51882 9251 8833 7304 1502 27 418 418 — — 42631 42618 13 16531 1095

B. CAPITAL ACCOUNT 1 Foreign Investment (a+b) a) Foreign Direct Investment (i+ii) i) In India Equity Reinvested Earnings Other Capital ii) Abroad Equity Reinvested Earnings Other Capital b) Portfolio Investment In India Abroad 2 Loans (a+b+c) a) External Assistance

47629 3688 52 52 — — 3636 2854 271 511 43941 43919 22 13377 577

4253 5563 8781 7252 1502 27 –3218 –2436 –271 –511 –1310 –1301 –9 3154 518

India's Overall Balance of Payments (Contd.) i) By India

6

8

–2

903 2766 404 2362 10176 9256

550 1285 193 1092 7779 7779

353 1481 211 1270 2397 1477

920 — 21952 19256 21952 19105 11457 10533 10495 8572 9063 8249 — 151 — 30 1919 1831 90643 78877 263 — C. ERRORS & OMISSIONS D. OVERALL BALANCE (Total Current Account, 177348 175113 Capital Account and Errors & Omissions (A+B+C) — 2235 E. MONETARY MOVEMENTS (i+ii) i) I.M.F. — — ii) Foreign Exchange Reserves (Increase – / — 2235 Decrease +) Source: Reserve Bank of India

920 2696 2847 924 1923 814 –151 –30 88 11766 263 2235

ii) To India b) Commercial Borrowings (MT & LT) i) By India ii) To India c) Short Term To India i) Suppliers’ Credit >180 days & Buyers’ Credit ii) Suppliers’ Credit up to180 days 3 Banking Capital (a+b) a) Commercial Banks i) Assets ii) Liabilities of which: Non-Resident Deposits b) Others 4 Rupee Debt Service 5 Other Capital Total Capital Account (1 to 5)

–2235 — –2235

6

8

–2

1089 569 3827 1967 532 138 3295 1829 11609 10833 11609 9766

520 1860 394 1466 776 1843

— 1067 –1067 16215 14084 2131 16215 14081 2134 6446 5154 1292 9769 8927 842 9174 8915 259 — 3 –3 — 3 –3 1068 2431 –1363 85696 77524 8172 — 368 –368 178896 183630 –4734 4734 — 4734

— — —

4734 — 4734